About Grounds for Exemption from Performance under the Draft Estonian Law of Obligations Act

• Author: Irene Kull
• Pages: 44-52

Irene Kull

About Grounds for Exemption from Performance under the Draft Estonian Law of Obligations Act

The sacred principle of the classical law of obligations was the idea of pacta sunt servanda (sanctity of contracts), which means that contracts are binding on any conditions. According to the classical theory of contracts, each reasonable person has the freedom to enter into a contract upon terms determined by that person and to be certain that a contract concluded voluntarily will be subject to judicial enforcement and binding on the parties. It is primarily in the public interest to hold contractual agreements binding under any circumstances. Everyone's freedom to decide whether to conclude a contract (Abschlussfreiheit) and to decide about the content of the contract (Inhaltsfreiheit), in addition to honesty in the process of entering into a contract, were to preclude unfairness in contractual relationships. Disputing of contracts was allowable if the contract had been concluded by fraud, mistake or duress. In the absence of those circumstances, the parties were bound to their contract. Unilateral denunciation of a contract was, therefore, in general, excluded¹.

The very same principles, characteristic of the classical contract law, also served as a basis for drafting the Estonian Civil Code (ECC) ² , applicable from 1 January 1965. Hence, in accordance with ECC section 174, unilateral refusal to perform an obligation or unilateral modification of contractual terms are not permitted, except in the cases prescribed by law.

The Riigikogu (Estonian parliament) is presently reading the draft Law of Obligations Act (LOA) ³ , which will replace the obligations part of the 1965 Civil Code. The applicable Estonian civil law contains no provisions to regulate the general grounds and procedure for unilateral withdrawal from a contract or for claiming specific performance from a party in breach or for exemption from performance. Changes to accompany the adoption of the Law of Obligations Act in contract law are, therefore, of fundamental importance, as principles substantially different from those of the applicable law will be provided in respect of the consequences of breach of the duty to perform and with regard to the permissibility of claiming specific performance. While the applicable law, as well as judicial practice, observes, quite strictly, the principles of pacta sunt servanda, the draft Law of Obligations Act contains provisions, which are rather based on the principle of clausula rebus sic stantibus. It is yet difficult to predict the consequences of this new and considerably more flexible regulation for Estonian legal practice and economy. However, it can be stated with certainty that the new regulation will require a different approach to the binding nature of contracts both from judges as well as advocates, who will be protecting the interests of their clients on the basis of the new Act.

Principle of pacta sunt servanda in modern contract law

The principle of pacta sunt servanda has always had its limits. Even in Roman law, no contract was absolutely binding or binding under all circumstances. Unilateral dissolution of the contract was permissible if a party failed to perform its contractual obligations (e.g. in the case of leases, mandates or contracts of sale). Another known basis for dissolution of contracts was laesio enormis, i.e. the right to dissolve a contract of sale if a plot of land had been sold at a price below its actual value. Pandectists allowed dissolution only in the event of breach of contract. That rule was established by canon law, adopted by followers of natural law and, eventually, it found its way to BGB (Bürgerliches Gesetzbuch ? the German Civil Code). Nowadays, statutory rights of withdrawal from a contract have been granted in the interest of consumer protection⁴.

Historically, the principle of pacta sunt servanda has been prejudiced by the principle known as the doctrine of clausula rebus sic stantibus. According to that doctrine, a contract is binding only in so far as the circumstances remain the same as at the time of the conclusion of the contract. That principle can be used to erode the binding nature of contractual promises, and thereby it substantially prejudices the pacta sunt servanda principle. The clausula doctrine fell into oblivion at the end of the 18^th century and the beginning of the 19^th century, when classical contract law, liberal economy and legal certainty were declared to be of superior value. Moralist philosophers were the first to draw attention to changes in the circumstances, thus laying a foundation to the recognition of the clausula principle⁵.

In the modern theory of contracts, two types of fundamental views can be found. Some authors maintain that modern contract law cannot be based on the positions of classical contract law any more, since those positions have inevitably become inappropriate in the light of the economic and philosophical developments. Others are trying to demonstrate that contract law has become increasingly relational in modern days. Contract law is studied from the aspects of several fields, and analysts are now interested not only in the legal but also the social, economic and philosophical aspects of contracts. Contract law has developed beyond the legal and economic spheres of interest, now also encompassing the social aspects. The efficiency of legal regulation and the development of legal policy are evaluated from the aspects of several disciplines and on the basis of the comprehensiveness of regulation. Hence the economic and social consequences and fundamental problems, rather than the legal aspects of legal regulation, seem to be the main focus in modern-day contract law⁶.

One such fundamental problem, which has become topical every so often throughout history, is the question of those circumstances whereunder contractual agreements should be binding on the parties and of when parties to a contract may be discharged from performance.

It was already stated by St. Thomas Aquinas that failure to keep promises was not a sin in the event of a change in circumstances, and Bartolus of Saxoferrato introduced the idea of implied condition ? rebus sic se habentibus ? for all kinds of possible transactions⁷. The 17^th century was a favourable period for the clausula doctrine, which was accordant with the predominant political situation of that time. The principle of clausula rebus sic stantibus first became a respectable doctrine in international law while in private law, its position was not the strongest. The 19^th century, in contrast, was not most favourable for the recognition of the clausula principle. The theory of intention, whereunder a person's intention concerns only certain circumstances and develops on the basis of knowledge and consideration of those circumstances, permitted breach of promises if those circumstances proved to be wrong. On the other hand, it was realised that the society's interest in ensuring legal certainty, guaranteed by ensuring a balance of interests between the contracting parties, was also worth protection. In particular, Windscheid's doctrine of tacit presupposition (Voraussetzungslehre) ⁸ was one of the attempts to ensure balance in contractual relationships, especially as that theory was based on the presumption that contracting parties plan the realisation of legal consequences under certain specific circumstances. Usually, the presumption that certain circumstances will remain unchanged is not a direct condition of a contract. If the presumption of unchanged circumstances, as considered at the time of concluding the contract, proves to be wrong, requirement of performance may be unfair and unreasonable, taking, however, into account that the promisee must have understood that the other party had been influenced by certain circumstances. In such event, the promisor should have the right to demand termination of the contract. For that reason, Windscheid's theory has been regarded to be close to the theory of conditional contracts, which is based on the condition that the circumstances remain unchanged during the entire life of the contract⁹.

Windscheid's theory could not be made acceptable to the drafters of the German Civil Code (BGB), and therefore, BGB does not contain a general rule about changes in the circumstances. However, modern versions of the clausula principle have been developed extra legem by courts and jurists¹⁰. An example of this is the frustration theory, the formulation of which became necessary in connection with the economic and political problems caused by the First World War, and, in particular, with regard to performance of long-term contracts influenced by those problems. By now, the clausula principle has become a part and parcel of modern German contract law¹¹.

In common-law countries, the clausula doctrine has not exerted any substantial influence on the development of contract law. It was already stated in the case of Paradine v. Jane (1647) ¹² that contractual obligations were absolute and no dissolution thereof was permitted. That principle prevailed in English law until the 19^th century, when the case of Taylor v. Caldwell (1863) ¹³ laid a foundation for the modern clausula doctrine¹⁴. Under the traditional common-law rules, parties to a contract were not excused from performance even by such circumstances, following the conclusion of the contract, that made performance impossible, and it was found that the effect of such circumstances on contractual obligations must be foreseen by the parties. That position is also in accordance with the principle of strict liability, which is recognised in common law in respect of contractual relationships¹⁵.

...